Judgments - Lexington Insurance Company (Respondents) v AGF Insurance Limited (Appellants) and one other action
Lexington Insurance Company (Respondent) v Wasa International Insurance Company Limited (Appellants) and one other action

HOUSE OF LORDS

SESSION 2008-09

[2009] UKHL 40

on appeal from:[2008] EWCA Civ 150

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Lexington Insurance Company (Respondents) v AGF Insurance Limited (Appellants) and one other action

Lexington Insurance Company (Respondent) v Wasa International Insurance Company Limited (Appellants) and one other action

Lexington Insurance Company (Respondents) v AGF Insurance Limited (Appellants) and one other action

Lexington Insurance Company (Respondents) v Wasa International Insurance Company Limited (Appellants) and one other action

[2009] UKHL 40

LORD PHILLIPS OF WORTH MATRAVERS

My Lords,

1. I have had the benefit of reading in draft the opinions of my noble and learned friends Lord Mance and Lord Collins of Mapesbury. I agree with their conclusion that this appeal should be allowed and the reasons that each gives for that conclusion, for those reasons are in harmony. I propose to explain shortly why I agree with their reasoning.

2. Essentially the result of this appeal is dictated by the agreed fact that the reinsurance contract that is the subject of the appeal is governed by English law and by the well established principle, not challenged in this case, that under English law a contract of reinsurance in relation to property is a contract under which the reinsurers insure the property that is the subject of the primary insurance; it is not simply a contract under which the reinsurers agree to indemnify the insurers in relation to any liability that they may incur under the primary insurance - British Dominions General Insurance Co Ltd v Duder [1915] 2 KB 394 at p. 400.

3. The following matters are common ground:

i) There is no significant difference between the terms of the primary insurance and the reinsurance.

ii) Under English principles of construction, the reinsurance covers only damage to property caused during the period of the cover.

iii) The Supreme Court of Washington, applying Pennsylvanian law to the construction of the primary insurance, has held that it covers incremental damage to property that includes damage that occurred both before and after the period of cover, provided only that part of the damage occurred during the period of cover.

iv) The decision of the Supreme Court of Washington is not perverse.

4. This last agreed fact is significant. The principle of the English law of construction that confines recovery to damage occurring during the period covered by the policy is no more nor less than the fundamental principle that the words of a contract should normally be given the meaning that they naturally bear. It has not been suggested, nor could it, that the alternative construction given to the policy by the Supreme Court of Washington is an alternative meaning that the words of the policy can naturally bear. The reason why the Washington Supreme Court has reached such a radically different interpretation of the scope of cover is because it has adopted a principle of construction that has been applied to contracts of insurance of property by the courts of Pennsylvania, and a minority of other American States. That principle, as Lord Collins has demonstrated, has its origin in the approach to insurance claims for the consequences of asbestos. I suspect that this may, in its turn, be derived from a similar approach to claims in tort.

5. It is unlikely that those who were party to the contract of reinsurance in 1977 can have anticipated that the interpretation of the wording common to the primary insurance and the reinsurance would differ so radically dependent on the law applied to its interpretation. Did the parties agree, or are they to be implied to have agreed, that in such an event the principles of interpretation adopted in respect of the primary insurance should be adopted, in preference to the principles of English law?

6. I agree with Lord Mance, for the reasons that he gives, that the full reinsurance clause in this case, and follow the settlements clauses in general, did not and do not have the effect of bringing within the cover of a policy of reinsurance risks that, on the true interpretation of the policy, would not otherwise be covered by it.

7. Longmore LJ concluded that, at the time that the reinsurance was written those parties to it would have anticipated that the interpretation of the primary insurance would be determined according to the law of Pennsylvania and implicitly agreed that the same law would apply to the interpretation of the reinsurance. For the reasons given by Lord Mance and Lord Collins, I do not consider that this finding was justified.

8. The vital issue is, I think, reduced to this. Did the parties to the reinsurance implicitly agree that whatever law might be applied to interpretation of the primary cover, and whatever result this might produce, would apply equally to the reinsurance? An affirmative answer to this question would, effectively, treat the contract of reinsurance as one to indemnify the primary insurer in respect of any liability sustained under the primary cover. There might, as Sedley LJ considered, be much to be said for adopting this approach, and it is an approach that it would be open to the market, by appropriate contractual terms, to follow. Those who, in 1977, were party to this reinsurance did not do so.

9. It is for these reasons that I agree with Lord Mance and Lord Collins that this appeal should be allowed and the judgment of Simon J restored.

LORD WALKER OF GESTINGTHORPE

My Lords,

10. I have had the privilege of considering in draft the opinion of my noble and learned friend Lord Collins of Mapesbury. I am in full agreement with it and for the reasons given by Lord Collins I would allow this appeal.

LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,

11. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Collins of Mapesbury. I entirely agree with it and add a brief opinion of my own only to stress the comparatively narrow basis on which I conclude that this appeal ought to succeed. All the relevant facts, law and argument I gratefully adopt from my Lords opinion and none of these shall I repeat.

12. That the respondent insurers (Lexington) were liable under the terms of their policy (the insurance contract) to the insured (Alcoa), as held, however surprisingly to English eyes, by the Supreme Court of Washington, cannot now be disputed. This liability was for the clean-up costs of pollution and contamination damage to Alcoas sites occurring during the 44-year period 1942-1986. No matter that the insurance contract was against the risk of all physical loss of or damage to Alcoas property only for the three-year period 1 July 1977 to 1 July 1980, the Supreme Court, applying Pennsylvania law, held that:

It seems clear from the policy language that any physical loss or damage manifesting itself during the time a . . . policy was in effect was covered by the policy, including pollution damage starting before the policy inception.

The language of the policy, the Court said, is very broad and contains no limitation as to time of the physical loss or damage to property. There is no exclusion in the policy for physical loss or damage that may have begun spreading before the policy inception.

13. That was the basis of Lexingtons liability to Alcoa and that Lexington was properly held thus liable is not in issue before your Lordships. What is in issue is the appellant reinsurers liability to Lexington under the reinsurers policies (the reinsurance contracts). The reinsurance contracts provided cover in respect of the same three-year period as the insurance contract and ostensibly in respect of the same loss: All Risks of Physical Loss or Damage (to the relevant property). In all material respects, save one, the terms of the reinsurance contracts mirrored those of the insurance contract. That one respect, central to the resolution of these appeals, was with regard to the applicable law respectively governing them. The insurance contract was subject to Pennsylania law (albeit, as Lord Collins explains, not predictably so at the date these contracts were entered into); the reinsurance contracts were subject to English law. Under Pennsylvania law, as already stated, the fact that cover was expressly provided only for the three years 1 July 1977 to 1 July 1980 was of no relevance in limiting the extent of the recoverable loss provided only that some physical damage became manifest during the three-year period. Plainly, however, that is not the position under English law. Under English law nothing could be clearer than that a contract providing cover for loss and damage occurring only during a specified three-year period could not be construed as covering in addition damage occurring before (or for that matter after) that three-year period.

14. Lexingtons response I understand to be essentially this. The all-important question is what constituted the insured damage under the respective contracts. The insured damage under the insurance contract was held to be that resulting from all damage to the property whensoever occurring providing only that some of it became manifest during the actual period of cover. It is, submit Lexington, possible to construe the reinsurance contracts similarly and, because of the strong presumption that liability under a proportional facultative reinsurance policy is co-extensive with liability under the primary policy, that, therefore, is the construction which the reinsurance contracts should be found to bear.

15. For my part I would reject this argument. Were it correct, indeed, it would follow, as Mr Sumption QC rightly acknowledged in the course of his submissions, that Lexington would be entitled to recover to the self same extent as they now claim even had the reinsurance cover extended not for the coincident period of three years but, say, for only three months (provided always, as stated, that some damage became manifest during that period). Given the fundamental importance under English law of the temporal scope of a time policy, I find it impossible to construe the reinsurance contracts in the way contended for.

16. "Physical loss or damage under a policy providing cover for three years simply cannot be construed under English law to include pre-existing damage. The respective contracts are not, of course, back to back as to their governing laws. However powerful and far-reaching the presumption that reinsurance is intended to respond to claims payable under the primary policy, it could not avail Lexington here unless English law were to regard it in effect as tantamount to a rule of lawunless, in short, English law were to dictate that reinsurance must always respond. English law does not, in my opinion, go so far. Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 and Groupama Navigation et Transports v Catatumbo CA Seguros [2000] 2 Lloyds Rep 350, clearly the decisions closest in point, are authority for the presumption. They do not warrant its application in all circumstances, certainly not so as to override so clear a temporal limitation as the reinsurance contracts stipulated here with regard to the risks covered.

17. I too therefore would allow these appeals.

LORD MANCE

My Lords,

Introduction

18. The long-term effects of damage to the environment are debated worldwide. The issue in this case is whether certain financial consequences can be passed by a Massachusetts insurer, Lexington Insurance Company (Lexington), to two London reinsurers, Wasa International Insurance Company Limited (Wasa) and AGF Insurance Limited (AGF). Lexington insured Aluminum Company of America (Alcoa) of Pennsylvania and its subsidiary, Northwest Alloys, Inc. (NWA) of Delaware under an American all risks difference in conditions (DIC) property damage insurance policy issued for the period from 1st July 1977 to 1st July 1980. Under this policy, Lexington has paid Alcoa and NWA some US$103 million in respect of environmental damage to property. It paid this sum in settlement of an even larger potential liability flowing from a decision of the Supreme Court of Washington. That decision exposed Lexington to liability to Alcoa and NWA for contamination occurring at particular sites over periods much longer than the three year policy period. Wasa and AGF had a 2½% line on a London market slip reinsuring Lexington for the three year period. They maintain that, whatever the position under the insurance, the reinsurance as a matter of construction only covered property damage occurring during that period. The issue in short is whether the English law reinsurance mirrors or follows the American insurance, so as to oblige Wasa and AGF to pay their relevant percentages of what Lexington have paid.

The insurance and reinsurance

19. There is an almost complete absence of background to the placing of the insurance and reinsurance. Information", said in the reinsurance slip to be on file C.E. Heath & Co. Limited", has not been located. The insurance was formalised on Lexingtons Special Floater form signed and dated at Boston, Massachusetts on 22nd August 1977. The Limit of Liability was $20 million for loss or damage arising from any one occurrence, subject however to an aggregate limit of $20 million any one policy year in respect of the peril of flood and surface waters and $20 million any one policy year in respect of the peril of earthquake. Occurrence was defined as any one loss(es), disaster(s), or casualty(ies) arising out of one event or common cause". There was a property damage deductible of $250,000 per occurrence. The premium was a total of $818,000 (payable in three annual instalments) for the policys three year term from 1st July 1977 to 1st July 1980 beginning and ending at noon standard time at the location of the property involved". Against the heading Perils Insured", the wording stated that: This policy insures against all physical loss of, or damage to, the insured property ..". Under the next heading Coverage excluded", the wording, reflecting the nature of DIC insurance, excluded a substantial number of risks, including those which might be expected to be insured under other policies. Although there was no express choice of law clause, the insurance contained a standard US Service of Suit clause:

In the event of the failure of [Lexington] to pay any amount claimed to be due hereunder, [Lexington] at the request of the Insured, will submit to the jurisdiction of any Court of Competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.

21. No amended Full reinsurance clause No. 1 has been identified, but the slip condition has been taken as referring to the Reinsurance Warranty Clause (Full R/I Clause No. 1) dated 3rd June 1943, which provided:

Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company and that said Company retains during the currency of this Policy at least .. on the identical subject matter and risk and in identically the same proportion on each separate part thereof, but in the event of the retained line being less than as above, Underwriters lines to be proportionately reduced.

It is unnecessary to consider whether this clause alone would incorporate into the reinsurance all the terms of the insurance which could be germane in that context. The slips references &/or as original against the headings FORM and INTEREST on any view incorporate the relevant insurance provisions relating to the subject matter and risks into the reinsurance.

22. As between the brokers and Lexington, 10% of the 25% brokerage was returned to Lexington. Perhaps surprisingly, this was not disclosed on the slip, whether as ceding commission or in any other way. How far reinsurers were aware of it is unclear. Unless they were, they must, in view of Lexingtons retention of $1,675,000, have thought that Lexington was for some reason prepared to enter into a reinsurance which would be loss-making if Lexington had to pay any claims at all under the insurance. That, though possible, seems unlikely. Simon J and the Court of Appeal were asked to consider as a secondary issue whether the retention of $1,675,000 was agreed as a simple aggregate sum or on a per occurrence basis. On this, I agree with the Court of Appeal, rather than the judge. The retention was a simple aggregate sum for the whole three year reinsurance period. This is what the slip on its face provides. The absence of any provision for the retention to be either per occurrence or on an annual aggregate basis contrasts with the slip provisions relating to the sum (re)insured. Secondly, the reinsurance cover would not make much commercial sense if the retention were on a per occurrence basis. A retention of $1,675,000 per occurrence equates with 8.375% of the maximum sum reinsured in respect of each occurrence (or with 8.375% of the maximum annual aggregate reinsured in the case of the perils of flood and earthquake). Although Lexington, through its share in the brokerage, was retaining 10% of the premium, in practice each occurrence would be very unlikely to give rise to the maximum loss reinsured. So, if the retention operated on a per occurrence basis, Lexington would in reality be retaining more than 10% of the risk for only 10% of the reinsurance premium.

History

23. For determination of the main issue argued on this appeal, it is necessary to know more of the history. Alcoa and NWA commenced proceedings against Lexington in the State of Washington in December 1992 in respect of damage involving 35 sites within the United States (18 owned by Alcoa or NWA, 17 not so owned) and in May 1996 in respect of damage involving a further 23 owned sites, some outside the United States. The proceedings were brought not only under Lexingtons DIC policy, but also against numerous other DIC insurers (some 67, including Underwriters at Lloyds) participating in policies for various periods between 1st July 1980 and 1st July 1984 and against numerous insurers (some 98, including Lexington during a ten-year period from 1974 to 1984, and Underwriters at Lloyds) issuing comprehensive general liability policies for various periods between 29th March 1956 and 1st March 1985. The explanation of these periods is uncertain, but it may be that Alcoa did not have (or perhaps could no longer locate) any relevant insurances outside such periods or that any relevant insurers outside such periods had ceased to be in business.

24. The proceedings related to contamination of the 58 sites by waste products generated and disposed by Alcoa and NWA over periods going back to the 1940s. Alcoa and NWA pleaded that in recent years the United States Environmental Protection Agency (EPA) had made claims against Alcoa and NWA for the clean up of such contamination, as a result of which Alcoa and NWA would incur loss. (It appears that Comprehensive Environmental Response, Compensation, and Liability Act of 1980 - CERLA or Superfund - rendered those responsible for past as well as future contamination liable for its remediation.) The pleading instanced contamination in the State of Washington at Alcoas L-Bar Products site in respect of which Alcoa and NWA were sued by the State of Washington in 1988 and at Alcoas Vancouver Facility, in respect of which the Washington Department of Ecology issued various orders from 1986 to 1990, leading to the discovery of contamination of the soil and groundwater beneath landfill.

25. The proceedings against insurers were tried before Judge Learned. She selected for Phase 1 of the trial three sites (the Vancouver Facility and sites in New York and Texas). In a preliminary ruling dated 10th June 1994 she held that the law of Pennsylvania should be applied to those issues of contract interpretation which raise conflict-of-law issues under the policies.

26. At an early stage during the trial, and in the light of written jury answers the judge further ruled on 15th May 1996 that most if not all of the claims on insurers were barred under the combination of the relevant contractual or statutory limitation provisions. Condition 17 in the DIC policy provided:

Suit against Company. No suit, action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the Assured of the occurrence which gives rise to the claim. Provided, however, that if by the laws of the State within which this policy is issued such limitation is invalid, then any such claim shall be void unless such action, suit or proceeding be commenced within the shortest limit of time permitted by the laws of such State to be fixed herein.

Massachusetts law provides that

No company .. shall make, issue or deliver any policy of insurance .. containing any condition, stipulation or agreement . limiting the time for commencing actions against it to a period of less than two years from the time when the cause of action accrues . Any such condition, stipulation or agreement shall be void".

Judge Learneds ruling was evidently based on the jurys findings that Alcoa had learned of property damage by the late 1970s and early 1980s, and discovered the occurrence which gave rise to its claims then. That ruling was set aside as regards Lexingtons DIC insurance by the decision of the Supreme Court of Washington dated 4th May 2000. Although at an early point in its judgment the Supreme Court recited that [t]he trial court determined the law of Pennsylvania applied, largely because Alcoas headquarters are located in Pittsburgh", and that [o]n appeal, no party disputes the trial judges Order on Choice of Law applying Pennsylvania law to resolve the issues before us", when it came to deal with the suit limitation, the Supreme Court said that, the Lexington DIC policy having been issued in Massachusetts, The parties agree Massachusetts law controls for the interpretation of these policies"; applying the relevant Massachusetts statute as interpreted by Massachusetts case-law, it held that no time bar applied since the cause of action against Lexington only accrued when Lexington denied coverage. In consequence of this ruling, Lexington appears to have been one of few insurers not entitled to the benefit of a contractual or statutory time-bar.